Budget 1995 Per

BUDGET OF THE UNITED STATES GOVERNMENT

ANALYTICALPERSPECTIVES

Fiscal Year 1995

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THE BUDGET DOCUMENTS

Budget o f the United States Government, Fiscal Year 1995 contains the Budget Message of the President and presents the Presidents budget proposals.

Analytical Perspectives, Budget o f the United States Government, Fiscal Year 1995 contains analyses that are designed to highlight specified program areas or provide other significant presentations of budget data that place the budget in perspective.

It includes economic and accounting analyses, such as a balance sheet-type presentation; information on Federal receipts and collections, including user fees and tax expenditures; analyses of Federal spending; detailed information on Federal borrowing and debt; the Budget Enforcement Act preview report; current services estimates; and other technical presentation, such as the national income and product accounts.

It also includes information on management improvements; the budget system and concepts; a listing of the Federal programs by agency and account; and a glossary of budget terms.

Historical Tables, Budget o f the United States Government, Fiscal Year 1995 provides data on budget receipts, outlays, surpluses or deficits, and Federal debt covering an extended time periodin many cases beginning in fiscal year 1940 and ending in fiscal year1999. These are much longer time periods than those covered by similar tables in other budget documents. The data in this volume and all other historical data

in the budget documents are consistent with the concepts and presentation used in the 1995 Budget, so the data series are comparable over time.

Budget o f the United States Government, Fiscal Year 1995Appendix contains detailed information on the various appropriations and funds that constitute the budget. The Appendix contains more detailed information than any of the other budget documents. It includes for each agency: the proposed text of appropriation language, budget schedules for each account, new legislative proposals, explanations of the work to be performed and the funds needed, and proposed general provisions applicable to the appropriations of entire agencies or group of agencies. Supplemental and rescission proposals for the current year are presented separately. Information is also provided on certain activities whose outlays are not part of the budget totals.

Automated Sources o f Budget Information. Copies of the budget number data in electronic form may be obtained from the U.S. Department of Commerce, National Technical Information Service, Springfield, VA 22161, telephone (703) 487-4650. Refer to stock number PB94-500030. Historical budget information is available on compact disk (CD) from the U.S. Department of Commerce, Office of Business Analysis, HCHB Room 4885, Washington, D.C. 20230, telephone (202) 482-1986. Refer to the National Economic, Social, and Environmental Data Bank (NESE-DB). There is a charge for both of these items.

GENERAL NOTES1. All years referred to are fiscal years, unless otherwise noted.2. Detail in this document may not add to the totals due to rounding.

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TABLE OF CONTENTSPage

Economic and Accounting Analyses

1. Economic Assumptions .................................................................................... 12. Stewardship: Toward a Federal Balance Sheet............................................... 93. Generational Accounting ................................................................................. 21

Federal Receipts and Collections

4. Federal Receipts ............................................................................................... 355. User Fees and Other Collections ..................................................................... 476. Tax Expenditures ............................................................................................. 53

Federal Spending

7. Federal Spending by Function, Subfunction, and Major Program.................. 81

Special Analyses and Presentations

8. Federal Investment Outlays and Capital Budgeting ...................................... 1079. Research and Development Expenditures....................................................... 131

10. Underwriting Federal Credit and Insurance ................................................... 13311. Aid to State and Local Governments............................................................... 16712. Federal Employment........................................................................................ 177

Federal Borrowing and Debt

13. Federal Borrowing and Debt ............................................................................ 185

Budget Enforcement Act Preview Report

14. Preview Report ................................................................................................. 19715. Review of Direct Spending and Receipts ......................................................... 20316. Deficit Reduction Fund .................................................................................... 209

Current Service Estimates

17. Current Services Estimates.............................................................................. 213

i


PageOther Technical Presentations

18. Trust Funds and Federal Funds ...................................................................... 24519. National Income and Product Accounts .......................................................... 25720. Comparison of Actual to Estimated Totals for 1993 ....................................... 26121. Relationship of Budget Authority to Outlays .................................................. 26722. Off-Budget Federal Entities ............................................................................. 26923. Crosscutting Categories .................................................................................... 271

High Risk Areas

24. Progress Report: Correcting High Risk Areas ................................................. 275

Federal Programs by Agency and Account

25. Federal Programs by Agency and Account....................................................... 301

Budget System and Concepts and Glossary

26. Budget System and Concepts and Glossary..................................................... 421

List of Charts and Tables ........................................................................................... 435

ii


ECONOMIC AND ACCOUNTING ANALYSES


1. ECONOMIC ASSUMPTIONS

IntroductionA year ago, the two-year old recovery from the 1990-

91 recession was still very fragile; now it is secure. This transformation was the result of a series of corrective actions taken by the private and public sectors. Households reduced their share of disposable income needed to service outstanding debt. Businesses improved their balance sheets by relying on equity rather than debt financing. In the construction industry, the overhang of excess office space was reduced substantially.

But most importantly, the Federal Government seriously addressed its own deficit problem. Congress enacted the Administration's deficit reduction plan, committed itself to follow with further cuts in health care costs and refocused spending priorities on productivity- enhancing investment.

The return to fiscal responsibility contributed to a fall of one percentage point in long-term interest rates between the election in November 1992 and the end of 1993. Even though they increased slightly in the closing months of the year, long-term interest rates in the fourth quarter were the lowest in over two decades. Falling rates stimulated key interest-sensitive sectors, pushed the stock market to record highs and reduced the debt servicing costs of governments, households and businesses.

By the second half of 1993, households and businesses were willing and able to undertake the investment spending that produces self-sustaining growth. Business and consumer confidence improved noticeably as sales picked up, orders increased, payrolls expanded and incomes rose. Even though the pace of economic activity quickened during 1993 and the unemployment rate declined steadily, inflation remained well under control. Thus, as 1994 begins, the essential elements for sustained, noninflationary growth are in place.

Signs of a Secure ExpansionThe favorable trends evident in product and labor

markets last year suggest that the economy in 1994 and the five years beyondwill be healthier than it has been during the past half dozen years.

Real GDP growth was faster in each successive quarter of 1993, reaching an estimated 4-1/2 percent annual rate in the final quarter. The acceleration was achieved through faster growth of spending on the investment components of GDP (consumer durables, housing and business equipment) rather than inventory accumulation or foreign trade.

To meet growing demand, businesses both lengthened the workweek and increased their hiring. In

the fourth quarter, the manufacturing workweek set a record high for the post-World War II period; factory overtime reached the highest level since record keeping began in 1956; and factories increased their payrolls by 40,000 following seven consecutive months of reductions. In addition to the manufacturing sector, the construction industry added significantly to its payrolls in the fourth quarter and private sector service jobs continued to grow.

The unemployment rate in December was 6.4 percent, down from 7.3 percent a year earlier. All major demographic groups experienced substantial unemployment rate declines during 1993.

The Consumer Price Index (CPI) rose just 2.7 percent during 1993; the producer price index, a mere0.2 percent. The reduction of inflation was broadly based; even the medical component of the CPI slowed last year. In addition, energy prices fell near the end of 1993. Faster growth of productivity in the second half of the year helped restrain inflation by providing an offset to rising labor compensation.

There were important restraints on growth during1993, some of which will continue during 1994, and perhaps even beyond.

On the domestic side, the shift from defense to nondefense priorities in the post-Cold War world has caused a sharp retrenchment by defense-related industries. During 1993, industries with 50 percent or more of their output geared to defense reduced their payrolls by 140,000, about the same as in 1992. At the state and local government level, fiscal pressures have curtailed hiring and spending, although these pressures might ease as a growing economy boosts tax revenues. In the construction sector, investment in new office buildings and multifamily rental housing was depressed in 1993 by the high vacancy rates of recent years. These rates, however, came down during 1993, suggesting a turnaround may be in the offing.

Abroad, recessions in Europe and Japan contributed to a widening of the U.S. trade deficit last year, and a further deterioration is probable this year. During 1993, industries with 20 percent or more of their employment directly or indirectly tied to exports lost 120,000 jobs, considerably less than the 230,000 of 1992.

Finally, the same competition from foreign and domestic firms that helps hold inflation in check will maintain pressure on U.S. companies to control costs by downsizing their workforces wherever feasible.

3


4 ANALYTICAL PERSPECTIVES

In the view of the Administration, and most private sector forecasters, however, the growth-promoting trends in the economy far outweigh the restraining ones. If the Congress delivers on its commitment to fiscal responsibility and the Federal Reserve continues to provide sufficient growth of the monetary aggregates to sustain the expansion, the economic future will be brighter than it has been in many years.

Economic AssumptionsThe Administrations economic assumptions devel

oped in early December 1993 project a continuation of the trends evident in 1993: real economic growth sufficiently strong to lower unemployment gradually without reigniting inflation. (See Table 1-1 for details.)

Between the fourth quarter of 1993 and the fourth quarter of 1994, real GDP is expected to increase 3.0 percent. From 1995 through 1999, the growth rate slows progressively to 2.5 percent, close to the estimate of potential growth.

The unemployment rate is expected to decline 0.3 percentage point in 1994. Further decreases of about this magnitude are projected each year through 1998, at which time the unemployment

rate is projected to be close to the noninflationary unemployment rate.1

Inflation, as measured by the Consumer Price Index, is projected to be 3.0 percent during 1994, compared with 2.7 percent during 1993. As the slack in labor and product markets is taken up, the inflation rate is assumed to edge up slightly, leveling off at 3.4 percent per year during 1997-1999.

Short-term interest rates are projected to rise moderately from their exceptionally low current levels as the economy expands, while long-term rates are projected to remain unchanged at their levels at the end of 1993.

Data that became available after these assumptions were completed suggest that real growth in the fourth quarter of 1993 was stronger than anticipated, while unemployment, inflation and interest rates were lower. Economic assumptions updated for these recent developments would raise the level of both real and nominal GDP by about 0.2 percent each year 1994-1999, but

1 Because of a major revision of the monthly labor force questionnaire beginning in January 1994, there is likely to be a noticeable break in the official unemployment rate beginning with 1994. Table 1-1 shows an unemployment rate projection consistent with the historical data through 1993. The unemployment rate based on the revised questionnaire might be about one-half percentage point higher than this.

TABLE 1-1. ECONOMIC ASSUMPTIONS i(Calendar years; dollar amounts in billions)

Actual Projections1992 1993 1994 1995 1996 1997 1998 1999

Gross Domestic Product (GDP): Levels, dollar amounts in billions:

Current dollars........................................................................................................................ 6,038 6,371 6,736 7,118 7,522 7,950 8,400 8,870Constant (1987) dollars .......................................................................................................... 4,986 5,126 5,284 5,433 5,579 5,725 5,873 6,021Implicit price deflator (1987*100), annual average............................................................... 121.1 124.3 127.5 131.0 134.8 138.9 143.0 147.3

Percent change, fourth quarter over fourth quarter:Current dollars........................................................................................................................ 6.7 5.0 5.8 5.6 5.7 5.7 5.7 5.6Constant (1987) dollars .......................................................................................................... 3.9 2.3 3.0 2.7 2.7 2.6 2.6 2.5Implicit price deflator (1987*100) ......................................................................................... 2.8 2.6 2.7 2.8 2.9 3.0 3.0 3.0

Percent change, year over year:Current dollars........................................................................................................................ 5.5 5.5 5.7 5.7 5.7 5.7 5.7 5.6Constant (1987) dollars .......................................................................................................... 2.6 2.8 3.1 2.8 2.7 2.6 2.6 2.5Implicit price deflator (1987*100) ......................................................................................... 2.9 2.6 2.6 2.8 2.9 3.0 3.0 3.0

Incomes, billions of current dollars:Personal income..................................................................................................................... 5,145 5,385 5,691 6,016 6,365 6,746 7,148 7,551Wages and salaries 2 .............................................................................................................. 2,973 3,083 3,261 3,442 3,636 3,849 4,071 4,293Corporate profits before tax .................................................................................................... 395 447 508 531 555 573 595 631

Consumer Price Index (all urban): 3Level (1982-84*100), annual average .................................................................................. 140.3 144.5 148.6 153.3 158.3 163.6 169.2 174.9Percent change, fourth quarter over fourth quarter................................................................ 3.1 2.8 3.0 3.2 3.3 3.4 3.4 3.4Percent change, year over year............................................................................................. 3.0 3.0 2.8 3.2 3.3 3.3 3.4 3.4

Unemployment rate, civilian, percent:4Fourth quarter level................................................................................................................. 7.3 6.7 6.4 6.0 5.8 5.6 5.5 5.5Annual average....................................................................................................................... 7.4 6.8 6.5 6.1 5.9 5.7 5.5 5.5

Federal pay raises, January, percent5 ..........................................................................................Interest rates, percent:

4.2 3.7 1.6 2.2 2.5 2.5 2.5

91-day Treasury bills6 ............................................................................................................ 3.5 3.0 3.4 3.8 4.1 4.4 4.4 4.410-year Treasury notes........................................................................................................... 7.0 5.9 5.8 5.8 5.8 5.8 5.8 5.8

1 Based on information available as of December 1993.2 Pre-health care reform. Reform is assumed to increase wages and salaries by $23 biion in 1997, $35 bfllion in 1998 and $47 billion in 1999.3 CPI for all urban consumers.Pre-1994 basis. The introduction of a new labor force questionnaire in January 1994 may result in higher unemployment rates than these shown in the table, s In January 1994 there was a 2.2% pay raise for military personnel.Average rate (bank discount basis) on new issues within period.


1. ECONOMIC ASSUMPTIONS 5TABLE 1-2. COMPARISON OF ECONOMIC ASSUMPTIONS IN THE 1994 AND 1995 BUDGETS

(Calendar years; dollar amounts in billions)

Percent increase:Nominal GDP:

1994 budget assumptions 1 .................1995 budget assumptions....................

Real GDP (percent change): 21994 budget assumptions....................1995 budget assumptions....................

GDP deflator (percent change): 21994 budget assumptions....................1995 budget assumptions....................

Consumer Price Index (percent change):21994 budget assumptions....................1995 budget assumptions....................

Civilian unemployment rate (percent):31994 budget assumptions....................1995 budget assumptions....................

91-day Treasury bill rate (percent):1994 budget assumptions....................1995 budget assumptions....................

10-year Treasury note rate (percent):1994 budget assumptions....................1995 budget assumptions....................

1 Adjusted for August 1993 revisions.2 Fourth quarter to fourth quarter.3Pre-1994 basis.

1993

6,3486,371

2.82.3

2.52.6

2.82.8

7.1 6.8

3.2 3.0

6.75.9

1994

6,736

3.03.0

2.42.7

2.73.0

6.66.5

3.7 3.4

6.65.8

7,0467,118

2.82.7

2.32.8

2.73.2

6.2 6.1

4.33.8

6.65.8

7,3977,522

2.62.7

2.22.9

2.7 3.3

6.05.9

4.7 4.1

6.55.8

7,7407,950

2.22.6

2.23.0

2.73.4

5.85.7

4.84.4

6.55.8

8,0708,400

1.82.6

2.23.0

2.73.4

5.75.5

4.94.4

6.45.8

would not change the growth rates shown in Table1-1. The update would also reduce the unemployment rate by one or two tenths in 1994-1997 and lower the ten-year Treasury note by one-tenth percentage point through 1999. These revisions are included in the Administration assumptions published in the Council of Economic Advisors, Economic Report of the President,1994. The changes would reduce the deficits for 1995-1999 by $5-6 billion a year compared to the deficits estimated using Table 1-1 assumptions.

The economic assumptions presume enactment of the Administrations budget proposals. The Administrations health care reform proposal was also taken into account in framing them. While there are likely to be important sectoral effects from health care reform, these are expected to be largely offsetting at the level of the economy as a whole. Thus, the projections of nominal and real GDP, the GDP implicit price deflator, the overall CPI, unemployment and interest rates shown in Table 1-1 are assumed to be unaffected.2

Impact of Changes in Economic AssumptionsThe budget for 1994 was based on economic assump

tions identical to those used by the Congressional Budget Office (CBO) at the time. In contrast, the 1995 budget is based on the Administrations own forecast and assumptions. While the rate of real growth projected for the next few years is similar, the 1995 budget assumptions show somewhat stronger real growth in the

2 The medical component of the CPI is expected to rise more slowly as a result of health care reform. By 1999, when the reform is fully implemented, medical inflation is assumed to be one percentage point higher than the overall CPI, compared with 2 percentage points higher in a baseline that excludes health care reform. This difference is assumed to be offset by differences in inflation outside the medical sector so that the overall rate ofinflation is the same for baseline and policy estimates. See Chapter 17, "Current Services Estimates."

out-years. They also show slightly higher inflation, and lower interest rates (the latter particularly reflecting the experience of this past year).

The changes in economic assumptions have significant effects on the budget outlook. Higher real growth and inflation rates both contribute to raising estimates of receipts. The higher inflation, however, also increases estimates of outlays for programs such as social security, the benefits for which rise automatically each year due to cost-of-living adjustments. Lower interest rates reduce estimated outlays for payment of interest on the public debt. The changes in economic assumptions since last years budget lower the 1994 deficit by $5.5 billion while the 1998 deficit is reduced by $40.6 billion (Table 1-3).

Omnibus Trade and Competitiveness Act of 1988As required by the Omnibus Trade and Competitive

ness Act of 1988, Table 1-4 shows estimates for economic variables related to saving, investment, and foreign trade consistent with the economic assumptions. The merchandise trade and current account balances deteriorated in fiscal year 1993, as growth in U.S. exports was restrained by recessions in Europe and Japan. The continued faster rate of growth in the United States than abroad is likely to further widen our external deficits.

Net private investment in the United States is projected to increase substantially as the economy expands. The sources of finance for the increased private investment are the substantial decline in the Federal deficit plus the larger inflow of foreign capital. Private domestic saving is expected to change little through 1995.

The Act requires information on the amount of borrowing by the Federal Government in private credit



TABLE 1-3. EFFECTS ON THE BUDGET OF CHANGE IN ECONOMIC ASSUMPTIONS SINCE LAST YEAR(In billions of dollars)

1994 1995 1996 1997 1998

Budget totals under 1994 budget economic assumptions and 1995 budget policies:Receipts.............................................................................................................Outlays...............................................................................................................

Deficit (-) ..................................................................................................Changes due to economic assumptions:

Receipts.............................................................................................................Outlays:

Inflation, mandatory programs......................................................................Unemployment..............................................................................................Interest rates.................................................................................................Interest on changes in borrowing .................................................................

Total, outlays............................................................................................

Decrease in deficit....................................................................................Budget totals under 1995 budget economic assumptions and policies:

Receipts.............................................................................................................Outlays...............................................................................................................

Deficit ( - ) ..................................................................................................

1,249.51,489.7

1,352.01,529.4

1,425.41,609.3

1.492.11.701.1

1.555.11.786.2

-240.2

-0.4

-0.7-0.8-4.4_ *

-177.4

+1.8

+0.7-0.9-9.8-0.5

-183.9

+1.9

+3.8-0.9

-14.2-1.1

-209.0

+13.0

+9.00.0

-16.5-2.0

-231.1

+31.8

+15.6-2.1

-18.5-3.7

-5.9 -10.5 -12.4 -9.6 -8.7

5.5

1,249.11,483.8

12.3

1.353.81.518.9

14.3

1,427.31,596.9

22.6

1,505.11,691.4

40.6

1,586.91,777.4

-234.8 -165.1 -169.6 -186.4 -190.5

TABLE 1-4. SAVING, INVESTMENT, AND TRADE BALANCE(Fiscal years; in billions of dollars)

1993 actual 1995 estimate

Current account............................................................................... -101 -145 to -105Merchandise trade balance.............................................................. -123 -175 to -135Net foreign investment.................................................................... -89 -140 to -100Net domestic saving (excluding Federal saving)1 ........................... 332 325 to 365Net private domestic investment...................................................... 203 280 to 320

1 Defined for purposes of Pubfic Law 100-418 as the sum of private saving and the surpluses of State and local governments. All series are based on National Income and Product Accounts except for the current account balance.

markets. This is presented in Chapter 13, "Federal Borrowing and Debt.

It is difficult to gauge with precision the effect of Federal Government borrowing from the public on interest rates and exchange rates, as required by the Act. Both are influenced by many factors besides Government borrowing in a complicated process involving supply and demand for credit and perceptions of fiscal and monetary policy here and abroad.

Structural vs. Cyclical DeficitWhen there is slack in the economy, receipts are

lower than they would be if resources were fully employed, and outlays for unemployment-sensitive programs (such as unemployment compensation and food

stamps) are higher. As a result, the deficit is higher than it would be at full employment. The portion of the deficit that can be traced to such factors is called the cyclical deficit. The remainder, the portion that would remain at full employment (consistent with a 5.5 percent unemployment rate), is called the structural deficit.

Changes in the structural deficit give a better picture of the impact of budget policy on the economy than the unadjusted deficit affords. The structural deficit also gives a clearer picture of the deficit problem that fiscal policy must address, since this part of the deficit will persist even when the economy has fully recovered, unless policy changes.

TABLE 1-5. ADJUSTED STRUCTURAL DEFICIT(In billions of dollars)

1992 1993 1994 1995 1996 1997 1998 1999

Actual deficit (unadjusted)..........................................Cyclical component................................................

Structural deficit..........................................................

290.461.8

254.752.0

234.842.4

165.130.3

169.621.1

186.415.1

190.57.6

181.14.0

228.62.4

202.628.0

192.43.3

134.911.1

148.511.3

171.36.1

182.94.9

177.13.3Deposit insurance1 ................................................

Adjusted structural deficit........................................... 231.0 230.6 195.7 146.0 159.8 177.4 187.8 180.41 For 1992 includes allied contributions for Desert Storm.


1. ECONOMIC ASSUMPTIONS 7In recent years, outlays for deposit insurance (mainly

for resolving insolvencies in the savings and loan industry) have had substantial impacts on the actual deficit. However, these outlays have little current impact on economic performance, because the Federal liability for S&L insolvencies occurred years ago. Furthermore, these are in the nature of one-time expenditures that will not be repeated. Indeed, future outlays for this purpose are expected to be negative as the Government sells the assets acquired in shutting down insolvent S&Ls. It has therefore become customary to remove deposit insurance outlays as well as the cyclical component from the actual deficit to compute the adjusted structural deficit. This is shown in Table 1-5.

The downward trend of the adjusted structural deficit over the next several years measures real progress in correcting the fiscal imbalance inherited by this Administration. Some period of restrictive policy was unavoidable if the actual deficit was to be reduced from the unsustainably high levels of the past decade. The decline in the level of the structural deficit is neither so pronounced nor abrupt as to pose a threat to sustained moderate economic growth. In particular, it is consistent with the economic assumptions underlying the budget, presented above.

Sensitivity of the Budget to Economic Assumptions

Both receipts and outlays are affected by changes in economic conditions. This sensitivity seriously complicates budget planning because errors in economic assumptions lead to errors in the budget projections. It is therefore useful to examine the implications of alternative economic assumptions.

Many of the budgetary effects of changes in economic assumptions are fairly predictable, and a set of rules of thumb embodying these relationships can aid in estimating how changes in the economic assumptions would alter outlays, receipts, and the deficit. The final table summarizes these rules of thumb.

Economic variables that affect the budget do not usually change independently of one another. Employment and output tend to move together in the short run: a higher rate of real GDP growth is associated with declining unemployment, while weak or negative growth is accompanied by rising unemployment. In the long run, however, changes in the average rate of growth of real GDP are mainly due to changes in the rates of growth of productivity and labor supply, and are not associated with changes in the average rate of unemployment. Inflation and interest rates are also linked: a higher expected rate of inflation tends to increase interest rates, while lower expected inflation reduces rates. Changes in real GDP growth or inflation have a much greater cumulative effect on the budget over time if they are sustained for several years than if they occur for only one year.

The table shows that if real GDP growth is lower by one percentage point in calendar year 1994 and the unemployment rate rises by one-half percentage point,

the 1994 deficit would increase by $7.5 billion. Receipts in 1994 would be lower by $6.6 billion, and outlays would be higher by $1.0 billion, primarily for unemployment-sensitive programs. If growth resumes at its previously assumed rate in 1995, the receipts shortfall would nonetheless grow further that year, to $14.4 billion, and outlays would be increased by $5.0 billion, raising the 1995 deficit by $19.4 billion relative to the base case. The budget effects would continue to grow slightly in later years. The permanent change in the deficit is due to the permanent reduction in the level of real (and nominal) GDP and taxable incomes and the permanent increase in unemployment relative to the baseline economic path, even though the rate of real growth in calendar year 1995 and beyond is the same.

The budget effects grow much larger if the real growth rate is assumed to be one percentage point less in each year, 1994-1999, with the unemployment rate continuing to rise by one-half percentage point, relative to its base path, in each year. On these assumptions, the levels of real and nominal GDP would be below the base case by a cumulatively growing percentage. The deficit would be $146.2 billion higher than under the base case by 1999.

The effects of slower productivity growth are shown in a third example, where real growth is one percentage point lower per year while the unemployment rate is unchanged. In this case, the estimated budget effects mount steadily over the years, but more slowly. The effect on the deficit reaches $121.5 billion by 1999.

Joint changes in interest rates and inflation have a smaller effect on the deficit than equal percentage point changes in real GDP growth because their effects on receipts and outlays are substantially offsetting. An example is the effect of a one percentage point higher rate of inflation and one percentage point higher interest rates during calendar year 1994 only. In subsequent years, the price level and nominal GDP would be one percent higher than in the base case, but interest rates are assumed to return to their base levels. Outlays for 1994 rise by $5.7 billion and receipts by $7.3 billion, for a decrease of $1.6 billion in the 1994 deficit. In 1995, outlays would be above the base by $13.3 billion, due in part to lagged cost-of-living adjustments; receipts would rise $15.4 billion above the base, however, resulting in a $2.0 billion decrease in the deficit. In subsequent years, the amounts added to receipts would be larger than the additions to outlays.

If the rate of inflation and the level of interest rates are higher by one percentage point in all years, the price level and nominal GDP would rise by a cumulatively growing percentage above their base levels. In this case, the effects on receipts and outlays mount steadily in successive years, adding $75.0 billion to outlays and $98.7 billion to receipts in 1999, which reduces the 1999 deficit by $23.6 billion.

The table also shows the interest rate and the inflation effects separately, and rules of thumb for the added



interest cost associated with higher or lower deficits (increased or reduced borrowing).

The effects of changes in economic assumptions in the opposite direction are approximately symmetric to those shown in the table. The impact of a one percentage point lower rate of inflation or higher real growth would have about the same magnitude as the effects shown in the table, but with the opposite sign.

These rules of thumb are computed while holding the income share composition of GDP constant; i.e., while assuming the same fractions of GDP go to wages and profits in all cases. Because different income components are subject to different taxes and tax rates, estimates of total receipts can be affected significantly by changing income shares. These relationships, however, have proved to be too complex to reduce to simple rules.

TABLE 1-6. SENSITIVITY OF THE BUDGET TO ECONOMIC ASSUMPTIONS(In billions of dollars)

Budget effect 1994 1995 1996 1997 1998 1999

Real Growth and EmploymentEffects of 1 percent lower real GDP growth in calendar year 1994 only, including higher unemployment:1

Receipts............................................................................................................................................................Outlays.............................................................................................................................................................

-6.61.0

-14.45.0

-16.86.5

-17.38.1

-18.09.9

-18.811.6

Deficit increase (+ ) .......................................................................................................................................Effects of a sustained 1 percent lower annual real GDP growth rate during 1994-1999, including higher un

employment: 1Receipts............................................................................................................................................................

7.5

-6.61.0

19.4

-21.36.9

23.3

-39.014.1

25.4

-58.021.9

27.9

-78.534.0

30.3

-100.845.3

Deficit increase ( + ) .......................................................................................................................................Effects of a sustained 1 percent lower annual real GDP growth rate during 1994-1999, with no change in un

employment:Receipts............................................................................................................................................................

7.5

-6.60.1

28.2

-21.60.8

53.1

-40.12.4

80.0

-60.35.3

112.5

-82.49.4

146.2

-106.614.9

Deficit increase ( + ) ........................................................... ........................................................................... 6.7 22.4 42.5 65.5 91.7 121.5Inflation and Interest Rates

Effects of 1 percentage point higher rate of inflation and interest rates during calendar year 1994 only: Receipts............................................................................................................................................................ 7.3

5.715.413.3

16.010.9

15.49.4

16.29.2

17.09.4

Deficit increase ( + ) .......................................................................................................................................Effects of a sustained 1 percentage point higher rate of inflation and interest rates during 1994-1999:

Receipts............................................................................................................................................................

-1.6

7.35.8

-2.0

23.219.1

-5.2

40.630.6

-6.0

58.242.4

-7.0

77.555.5

-7.6

98.775.0

Deficit increase (+ ) .......................................................................................................................................Effects of a sustained 1 percentage point higher interest rate during 1994-1999 (no inflation change):

Receipts............................................................................................................................................................

-1.6

0.75.3

-4.1

1.815.2

-10.0

2.421.3

-15.8

2.726.7

-22.0

2.931.9

-23.6

3.244.3

Deficit increase (+) ....................................................................................................................................... 4.6 13.4 18.9 24.0 29.0 41.2Effects of a sustained 1 percentage point higher rate of inflation during 1994-1999 (no interest rate change):

Receipts............................................................................................................................................................ 6.6 21.4 38.2 55.5 74.6 95.5Outlays............................................................................................................................................................. 0.5 3.9 9.3 15.7 23.6 30.7

Deficit increase (+) ....................................................................................................................................... -6.2 -17.5 -28.9 -39.8 -50.9 -64.8Interest Cost of Higher Federal Borrowing

Effect of $100 billion additional borrowing during 1994 ................................................................................... 2.2 4.6 5.0 5.5 6.0 6.3iThe unemployment rale is assumed to be 0.5 percentage point higher per 1.0 percent shortfal in the level of real GOP.


2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET

IntroductionThis chapter presents a framework for describing the

financial condition of the Federal Government and its performance as a steward of publicly-owned resources. Although the data are similar in some ways, there are basic conceptual differences that distinguish the tables below from a business balance sheet. The Government's sovereign powers have no counterparts in the business world, and its resources and responsibilities extend beyond the types of assets and liabilities found on a conventional balance sheet. For this reason, it is not possible to judge how well the Government is discharging its stewardship obligations simply from an examination of its own books. A review of the Governments contribution to national well-being and security is also needed.

The differences between Government and business accounting, together with serious limitations in the available data, argue for caution in interpreting the material presented below. Conclusions based on this presentation are necessarily tentative and subject to future revision as the estimating methods are improved and better data become available. The presentation consists of three components:

The first, summarized in Table 2-1, shows Federal assets and Federal liabilities resulting from past Government operations. In this table, what the Government owns and what it owes are defined relatively narrowly. This table corresponds most closely to a corporate balance sheet.

The second component, as reflected in Chart 2-2, consists of Federal budget projections. The projections indicate possible future paths for the balance between Federal resources and responsibilities and show how policy changes can affect that balance. In this section, Table 2-2 also shows the actuarial balances for the major social insurance programs and how they have changed in the past year.

The final component consists of various ways in which Federal activities contribute to social and economic well-being. Table 2-3 shows how Federal investments have contributed to national wealth. In a future development, this framework could be expanded to include tables showing Government performance measures including broad indicators of social and economic well-being.

The Federal Government does not have a single bottom line that would reveal its financial status in a glance, but the tables and charts shown here can contribute to a balanced view of that condition and the Government's stewardship of its resources. The Government's liabilities exceed its owned assets and that gap

has widened markedly over the last decade or more. The Presidents economic plan should narrow the gap as a result of deficit reduction, national health reform, and expanded Federal investments.

Relationship with FASAB ObjectivesThe framework presented here meets one of the four

objectives1 of Federal financial reporting recommended by the Federal Accounting Standards Advisory Board and adopted for use by the Federal Government in September 1993. This Stewardship Objective says:

Federal financial reporting should assist report users in assessing the impact on the country of the Governments operations and investments for the period and how, as a result, the Governments and the Nations financial conditions have changed and may change in the future. Federal financial reporting should provide information that helps the reader to determine:

3a. Whether the Governments financial position improved or deteriorated over the period.

3b. Whether future budgetary resources will likely be sufficient to sustain public services and to meet obligations as they come due.

3c. Whether Government operations have contributed to the Nations current and future well-being.

The Board is in the process of developing guidance as to the specific displays that would meet this Objective and the accounting standards for use in such statements and schedules. This experimental presentation explores one possible approach for meeting the Objective at the Govemmentwide level.

What Can Be Learned from a Balance Sheet Approach

The budget is an essential tool for allocating resources within the Federal Government, but the standard budget presentation with its focus on annual outlays, receipts, and the deficit, does not provide sufficient information for a full analysis of the Governments financial and investment decisions. Additional information about the stocks of Federal assets and liabilities is needed as well. It is also important to examine the effects of Government decisions on national wealth and well-being. Measurements that correct for inflation are also useful. The framework presented here would fill some of these needs.

Assessing the financial condition of the Government is more complicated than drawing up a balance sheet for a business enterprise. The Governments sovereign powers to tax, regulate commerce, and set monetary policy give it resources that no private enterprise possesses. Although these resources are not assets in any conventional sense, they need to be considered in

1 Objectives of Federal Financial JReporting, Statement of Federal Financial Accounting Concepts Number 1, Spetember 2, 1993. The other three Objectives relate to budgetary integrity, operating performance, and systems and controls.

9



Figure 2-1 - A BALANCE SHEET PRESENTATION FOR THE FEDERAL GOVERNMENT

ASSETS/ LIABILITIES/RESOURCES RESPONSIBILITIES

Federal Assets Federal LiabilitiesFinancial Assets Financial Liabilities

Gold and Foreign Exchange Currency and Bank ReservesOther Monetary Assets Debt Held by the PublicMortgages and Other Loans Federal Miscellaneous

Less Expected Loan Losses Government Guarantees and Insurance LiabilitiesOther Financial Assets Assets Deposit Insurance

and Pension Benefit GuaranteesPhysical Assets Liabilities Loan Guarantees

Fixed Reproducible Capital (Table 2-1) Other InsuranceDefense Federal Pension LiabilitiesNondefense

Inventories Net BalanceNon-reproducible Capital

LandMineral Rights

Resources/Recipts Responsibilities/OutlaysProjected Receipts t ___ti__ Discretionary OutlaysLong-Run Mandatory OutlaysAddendum: Real GDP Projections Federal Social Security

Budget Health ProgramsProjections Other Programs(Figure 2-2) Net Interest

Deficit

National Assets/Resources National Needs/ConditionsFederally Owned Physical Assets Indicators of economic, social,State & Local Physical Assets National educational, and environmental

Federal Contribution Wealth conditions to be used as a guide toPrivately Owned Physical Assets and Government investment andEducation Capital Well-Being management.

Federal Contribution (Table 2-3)R&D Capital

Federal Contributionref. 1GRAPH95.BUDCHAP2-A


2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET 11

any complete review of the Governments financial condition.

Similar differences exist on the liabilities side. Some Government obligations have clear counterparts in the business world. For example, Treasury notes are similar to corporate bonds and clearly belong on a Government balance sheet. But the Government has other obligations with a financial dimension for which there are no clear analogues in business accounting. For example, the Governments obligation to promote the general welfare has led in the twentieth century to the establishment of a broad array of social welfare programs. It is reasonable to expect that these programs will continue in the future, and that they will require future Federal funding. Does this make them a liability?

Such obligations are different from the legally binding liabilities normally found on a business balance sheet, but they can have implications for the Treasury that are similar to a liability. If such obligations were ignored, a Government balance sheet would provide an incomplete picture of the Governments financial condition, but it is hard to know where to draw the line between obligations that belong on and off the balance sheet once the analogy with a business liability is abandoned.

Further complicating the issue, almost all of the broader Federal resources and responsibilities are subject to change through the political process, and future decisions by Congress and the President could alter

their value. If they were included in a balance sheet with Government debt, it would be very difficult to estimate the size of the Governments liabilities.

In the presentation that follows, these issues are resolved by presenting a series of tables and charts no single one of which is the balance sheet. The schematic diagram, Chart 2-1, shows how they fit together. The tables and charts should be viewed as an ensemble. The main elements of each can be grouped together in two broad categories, either as assets/resources or as liabilities/responsibilities. When combined with appropriate data, this framework permits a balanced assessment of Federal stewardship.

Reading down the left-hand side of the diagram shows the range of Federal resources, including assets the Government owns, tax receipts it can expect to collect, and national wealth that provides the base for Government revenues.

Reading down the right-hand side reveals the full range of Federal obligations and responsibilities, beginning with Governments acknowledged liabilities, such as the debt held by the public, and going on to include future budget outlays. This column potentially would include a set of indicators highlighting areas where Government activity might require adjustment either through new investment or through reductions or reallocations of existing resources.

THE FEDERAL GOVERNMENTS ASSETS AND LIABILITIES

Table 2-1 presents data on the value of Federal assets and liabilities summarizing what the Government owns and what it owes as a result of its past operations. The values are measured in terms of constant1993 dollars to remove the distorting effects of inflation on the comparisons across time.

For more than three decades, the Governments liabilities have exceeded the value of its assets. In the 1960s, however, the disparity was small and for many years it deteriorated only gradually. In the late 1970s a speculative run-up in the prices of oil, gold, and other real assets boosted the value of Federal assets. Temporarily, the balance of Federal assets and liabilities improved.2 Following 1981, however, there was an especially large decline in the net balance which has continued.

The sharp decline in net Federal assets was due in large part to the Federal budget deficits of the 1980s, which led to a rapid increase in Federal debt, as well as to the declining market value of some Federal assets. Currently, the net balance of assets and liabilities is about -$2,800 billion or almost -$11,000 per capita.

2 This temporary improvement highlights the importance of the other tables in this presentation. What was good for the Federal Government as an asset holder was not necessarily favorable to the economy. The decline in inflation, which reversed the speculative runup in gold and other commodity prices, reversed the improvement in the Federal balance sheet while improving national economic performance.

AssetsThe assets in Table 2-1 reflect a complete listing

of physical and financial resources owned by the Federal Government. They correspond to the items that would appear on a Federal balance sheet, but they do not constitute an exhaustive catalogue of Federal resources. For example, the Governments most important financial resource, its ability to tax, is not reflected.

Financial Assets: At the end of 1993, the Federal Governments holdings of financial assets amounted to about $570 billion. Government loans (measured in constant dollars) reached a peak in the mid-1980s. Since then, Federal loans have declined. Government-owned mortgages expanded during the savings and loan crisis, and have declined sharply over the last two years.

The face value of mortgages and other loans overstates their economic worth. OMB estimates that the discounted present value of future loan losses is about $58 billion as of 1993. These estimated losses are subtracted from the face value of outstanding loans to obtain a better estimate of their economic worth. These estimated losses increased by $18 billion in real terms between 1990 and 1993.

Over time, variations in the price of gold have accounted for major swings in this category. Since 1980, gold prices have fallen by 80 percent and the real value



TABLE 2-1. GOVERNMENT ASSETS AND LIABILITIES *(As of the end of the fiscal year, in billions of 1993 dollars)

1960 1965 1970 1975 1980 1985 1990 1991 1992 1993

ASSETSFinancial assets:

Gold and foreign exchange................................ 101 70 59 130 318 154 194 176 173 171Other monetary assets ............... ....................... 38 54 32 14 37 23 29 21 37 37Mortgages and other loans................................ 126 159 202 200 270 327 263 266 245 219

Less expected loan tosses............................. -2 -6 -10 -20 37 -36 -40 -46 -48 -58Other financial assets........................................ 59 78 63 63 81 104 157 185 213 190

Subtotal.......................................................... 323 355 346 387 669 571 603 604 620 559Physical assets:

Fixed reproducible capital:Defense.......................................................... 853 856 839 674 569 667 735 749 749 747Nondefense.................................................... 151 178 189 213 241 239 243 240 239 240

Inventories.......................................................... 260 221 203 178 214 242 209 191 177 163Nonreproducible capital:

Land ............................................................... 84 116 144 224 284 305 301 272 243 222Mineral rights ................................................. 302 279 230 320 581 655 436 412 389 370

Subtotal...................................................... 1,650 1,649 1,605 1,610 1,889 2,108 1,924 1,865 1,798 1,742

Total assets......................................... 1,973 2,005 1,951 1,996 2,558 2,679 2,527 2,469 2,418 2,301LIABILITIES

Financial liabilities:Currency and bank reserves.............................. 227 245 268 270 271 284 341 344 360 385Debt held by the public..................................... 985 957 800 777 989 1,736 2,369 2,552 2,785 2,922Miscellaneous..................................................... 60 60 57 52 59 66 91 83 72 68

Subtotal.......................................................... 1,272 1,262 1,125 1,099 1,318 2,086 2,802 2,980 3,217 3,375Insurance liabilities:

Deposit insurance ..............................................Pension benefit guarantees................................Loan guarantees................................................Other insurance.................................................. 31

127

621

411719

2293125

8392615

108573818

845960 17

77627017

53752723

Subtotal.......................................................... 31 29 27 77 87 90 221 220 226 178Federal employee pension liabilities....................... 739 923 1,078 1,207 1,656 1,625 1,550 1,538 1,547 1,577

Total liabilities.......................................... 2,042 2,214 2,230 2,383 3,062 3,801 4,572 4,738 4,990 5,130Balance..................................................... -69 -209 -279 -387 -504 -1,122 -2,045 -2,270 -2,572 -2,829Per capita (in 1993 dollars)..................... -382 -1,077 -1,361 -1,790 -2,206 -4,692 -8,161 -8,957 -10,039 -10,925

This table shows assets and liabilites for the Government as a whole, including the Federal Reserve System. Therefore, it does not break out separately the assets held in certain Government accounts, such as social security, that are the obligation of specific Government agencies. Estimates for 1993 are extrapolated in some cases.

of U.S. gold and foreign exchange holdings has dropped by about half.

Fixed Reproducible Capital: The Federal Government is a major investor in physical capital. Government- owned stocks of fixed capital amounted to over $1.0 trillion in 1993. About three-quarters of this capital is in the form of military equipment and structures. From 1960 to 1980, the net stock of defense capital fell as a share of GDP, but since 1980 the ratio has held steady at between 12 and 13 percent. The slowdown in defense purchases that followed the end of the Cold War has not yet had much effect on the accumulated net stock of fixed defense capital.

Inventories: The effects of the slowdown in defense purchases have been more noticeable for inventories. Data on Federal inventories are maintained by the Bureau of Economic Analysis, Department of Commerce. Since the late 1980s, Federal inventories have declined by about 20 percent, accounted for entirely by a drop in military stocks.

Non-reproducible Capital: The Government owns significant amounts of land and mineral deposits. There are no official estimates of the market value of these holdings. Researchers in the private sector have estimated what they are worth, and these estimates are extrapolated in Table 2-1. Since the late 1980s, land values have fallen; oil prices have fluctuated but are lower now than three years ago. These shifts have pulled down the value of Federal land and mineral deposits.

Total Assets: The total real value of Government assets has declined somewhat over the last 10 years, principally because of declines in the real prices of gold, land, and minerals. At the end of 1993, the Governments holdings of all assets were worth about $2.3 trillion.

LiabilitiesThe liabilities shown in Table 2-1 are analogous to

a business corporations liabilities and include public


2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET 13debt, trade credit, and pension obligations owed to Federal workers. Other Federal financial responsibilites, however, are not reflected in this table.

Financial Liabilities: These amounted to about $3.4 trillion at the end of 1993. The largest component was the Federal debt held by the public, amounting to $2.9 trillion. This measure of Federal debt is net of the holdings of the Federal Reserve System, which exceeded $300 billion in 1993. The Federal Reserve is an independent agency, but it is part of the Federal Government, and its assets and liabilities are included here in the Federal totals.

In addition to debt held by the public, the Governments financial liabilities include $390 billion in currency and bank reserves, which are mainly obligations of the Federal Reserve System, and about $70 billion in miscellaneous liabilities.

Guarantees and Insurance Liabilities: The Federal Government has contingent liabilities arising from loan guarantees and insurance programs. When the Government guarantees a loan or offers insurance, the initial outlays may be small or even negative, if a fee is charged, but the risk of future outlays can be large. The deposit insurance programs have experienced large losses recently following many years in which these programs had no budgetary cost in excess of premiums.

In the past, the budget did not recognize the risk of such future outlays, even when they were predictable. In the last few years, however, techniques have been developed which permit an estimate of the budgetary cost incurred from current commitments that risk future outlays. These estimates are reported in Table2-1. They amounted to about $180 billion in 1993.

Federal Pension Liabilities: The Federal Government owes pension benefits to its retired workers and to current employees who will eventually retire. The amount of these liabilities is large. As of 1992, the discounted present value of the benefits is estimated to have been around $1.5 trillion. The estimate for 1993 is an extrapolation of the recent trend.3The Balance o f Net Liabilities

The balance between Federal liabilities and Federal assets has deteriorated over the past decade at a rapid rate. In 1981, the negative balance was less than 10 percent of GDP. Currently, it is estimated to be over 40 percent. Although the Government need not maintain a positive balance, because the range of Government resources extends beyond the conventional assets shown in Table 2-1, continuation of this trend would be worrisome.

THE BALANCE OF RESOURCES AND RESPONSIBILITIES

The data summarized in Table 2-1 are useful in showing some of the consequences of the Government's past policies, but the Governments continuing commitments to provide public services are not reflected in this table, nor can the Governments broader resources be displayed in a table limited to assets that it owns. A better way to examine the balance between future Government obligations and resources is a budget projection. Examples of such projections are summarized in Chart 2-2.

The Governments budget deficit is highlighted in this chart. Last years budget agreement brings down the Federal deficit over the next few years. This will be a significant improvement, but permanent success in controlling the deficit will depend on health reform and its effectiveness in controlling Federal medical costs in the years after 1998. The initial estimates of the effect

of health reform suggest that significant deficit reduction is achievable by the end of the decade.

For the period beyond the year 2000, the budget outlook is highly uncertain. Demographic trends that will begin to assert themselves early in the next century promise to raise the Federal cost of social security and other benefits for the elderly. Future adjustments may be needed to cope with these responsibilities.

Some futxire claims on budgetary resoxirces deserve special emphasis because of their importance in individual retirement planning. These claims are highlighted in Table 2-2. The Social Secxirity Trustees present an annual report on the balance in the Social Secxirity Trust Fund based on a 75-year projection of futxire costs and benefits. Table 2-2 shows how these projections changed between 1992 and 1993. The table also reports similar projections for the Medicare Trust Fxind.

3 These pension liabilities are expressed as the acturial present value of benefits accrued- to-date based on past and projected salaries. In the version of this table published previously, this liability was based only on past salaries.



TABLE 2-2. CHANGE IN 75-YEAR ACTUARIAL BALANCE FOR OASDI AND HI TRUST FUNDS(ALTERNATIVE 10

(As a percent of taxable payroll)

OASI Dl OASDI HI

Actuarial balance in 1992 report ............................................................................Changes in balance due to changes in:

Valuation period......................................................................................................Economic and demographic assumptions..............................................................Disability assumptions............................................................................................

-1.01

-0.050.090.00

-0.46

0.000.01

-0.08

-1.46

-0.050.10

-0.08

-4.20

-0.120.09

Revised base due to 1992 costs........................................................................... -0.52-0.460.10

Home health utilization...........................................................................................Other changes........................................................................................................

Total changes.....................................................................................................Actuarial balance in 1993 report ............................................................................

0.00 0.03 0.030.04

-0.97-0.04-0.49

0.00-1.46

-0.91-5.11

Chart 2-2. FEDERAL BUDGET DEFICITAS A PERCENT OF GDP

ret IGEAPIPS.BUPCHAW-B

NATIONAL WEALTH AND FEDERAL INVESTMENTS

Unlike a private corporation, the Federal Government routinely invests in ways that do not add directly to its assets. For example, Federal grants are frequently used to fund capital projects that involve investment at the State or local level of government. Such investments are often valuable nationally, but they are not owned by the Federal Government.

The Federal Government also invests in education and R&D. These outlays contribute to future productivity and are in that sense analogous to an investment in physical capital. Indeed, economists have computed stocks of human and knowledge capital to reflect the

accumulation of such investments. Nonetheless, these capital stocks are not owned by the Federal Government, nor would they appear on a Federal balance sheet.

Table 2-3 presents a national balance sheet. It includes estimates of total national wealth classified in three categories: physical assets, education capital, and R&D capital. The Federal Government has made contributions to each of these categories, and these contributions are also shown in the table.


2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET 15TABLE 2-3. NATIONAL WEALTH

(As of the end of the fiscal year, in trillions of 1993 dollars)

1960 1965 1970 1975 1980 1985 1990 1991 1992 1993

ASSETSPublicly owned physical assets:

Structures and equipment.................................. 2.1 2.4 2.8 3.3 3.6 3.6 3.7 3.7 3.8 3.8Federally owned or financed.......................... 1.1 1.2 1.3 1.3 1.3 1.4 1.5 1.5 1.5 1.5

Federally owned........................................ 1.0 1.0 1.0 0.9 0.8 0.9 1.0 1.0 1.0 1.0Grants to state and local governments..... 0.1 0.2 0.2 0.4 0.5 0.5 0.5 0.5 0.5 0.5

Funded by state and local governments....... 0.9 1.2 1.5 2.1 2.3 2.1 2.2 2.2 2.2 2.2Other Federal assets......................................... 0.7 0.7 0.6 0.8 1.4 1.3 1.1 1.0 0.9 0.9

Subtotal ................................................. 2.8 3.0 3.4 4.2 5.0 4.9 4.8 4.7 4.7 4.6Privately owned physical assets:

Reproducible assets........................................... 5.6 6.3 7.9 10.1 12.6 13.0 14.3 14.3 14.3 14.5Residential structures.................................... 2.0 2.3 2.7 3.6 4.7 4.7 5.2 5.2 5.3 5.4Nonresidential plant and equipment .............. 2.0 2.3 3.0 3.9 4.9 5.3 5.7 5.7 5.7 5.7Inventories...................................................... 0.7 0.8 0.9 1.1 1.3 1.2 1.2 1.1 1.1 1.1Consumer durables........................................ 0.9 1.0 1.3 1.4 1.7 1.8 2.2 2.2 2.3 2.3

Land.................................................................... 2.0 2.3 2.6 3.3 4.9 5.6 5.6 5.1 4.5 4.1

Subtotal ................................................. 7.6 8.6 10.4 13.3 17.5 18.6 19.9 19.3 18.8 18.6Education capital:

Federally financed.............................................. 0.1 0.1 0.2 0.3 0.4 0.5 0.7 0.7 0.7 0.8Financed from other sources............................. 6.3 8.0 10.5 11.8 14.5 17.3 22.0 23.0 24.2 25.5

Subtotal ................................................. 6.3 8.2 10.7 12.1 14.9 17.9 22.7 23.7 24.9 26.3Research and development capital:

Federally financed R&D..................................... 0.2 0.3 0.5 0.5 0.6 0.6 0.7 0.7 0.8 0.8R&D Financed from other sources..................... 0.1 0.2 0.3 0.4 0.4 0.6 0.8 0.8 0.8 0.8

Subtotal ................................................. 0.3 0.5 0.7 0.9 1.0 1.2 1.5 1.5 1.6 1.6

Total assets..................................... 17.0 20.4 25.3 30.5 38.5 42.5 48.9 49.3 50.0 51.2

LIABILITIES:Net claims of foreigners on U.S.......................... -0.2 -0.2 -0.2 -0.2 -0.5 -0.2 0.3 0.4 0.5 0.6

Balance .......................................................... 17.2 20.6 25.6 30.7 38.9 42.7 48.6 48.9 49.5 50.6Per capita (thousands of 1993 dollars).................. 95.0 106.0 124.8 142.3 170.4 178.8 193.7 192.9 193.3 195.3

ADDENDA:Total Federally funded capital............................ 2.1 2.3 2.6 2.9 3.7 3.9 4.0 4.0 4.0 4.0Percent of national wealth................................. 12.2 11.2 10.2 9.5 9.4 9.1 8.2 8.1 8.0 7.9

Data in this table are especially uncertain, because of the assumptions needed to prepare the estimates. Overall, the Federal contribution to the current level of national wealth is about 8 percent. Chart 2-3 illustrates the relative contribution of different categories of wealth to the national total.Physical Assets

These include stocks of plant and equipment, office buildings, residential structures, and government physical assets such as military hardware. Automobiles and consumer appliances are also included in this category. The total amount of such capital is vast, amounting to around $23 trillion in 1993. By comparison GDP was only $6 trillion.

The Federal Governments contribution to this stock of capital includes its own physical assets plus $0.6 trillion in accumulated grants to State and local governments for capital projects. The Federal Government has financed about one-quarter of the physical capital held by other levels of government.

Education CapitalEconomists have developed the concept of human cap

ital to reflect the notion that individuals and society invest in people as well as in physical assets. Investment in education is a good example of how human capital is accumulated.

For this table an estimate has been made of the stock of capital represented by the Nations investment in education. The estimate is based on the cost of replacing the years of schooling embodied in the U.S. population aged 16 and over. The idea is to measure how much it would cost to reeducate the U.S. workforce at todays prices.

This is a crude measure, but it can provide a rough order of magnitude. According to this measure, the stock of education capital amounted to $26 trillion in 1993, of which about 3 percent was financed by the Federal Government. The total exceeded the Nations stock of physical capital. The main investors in education capital have been State and local governments, parents, and the students themselves who often forego earning opportunities in order to acquire education.



Research and Development CapitalResearch and development (R&D) can also be thought

of as an investment, because R&D represents a current expenditure for which there is a prospect of future returns. After adjusting for depreciation, the flow of R&D investment can be added up to provide an estimate of the current R&D stock.4 That stock is estimated to have been about $1.6 trillion in 1993. Although this is a large amount of research, it is a relatively small portion of the total national wealth. About half of this stock was funded by the Federal Government.Liabilities

When considering the debts of the Nation as a whole, the private debts that Americans owe to one another cancel out, and the only debts that remain are those owed to foreigners. Americas foreign debt has been increasing rapidly in recent years, as a consequence of the U.S. trade deficit, but the size of this debt is small compared with Americas total stock of assets.

Most of the Federal debt held by the public is owned by Americans, so it does not appear in Table 2-3. Only that portion of the Federal debt held by foreigners is included in this table. Even so, it is of interest to compare the imbalance between Federal assets and liabilities with national wealth. The Federal imbalance as estimated in Table 2-1 amounts to less than 5 percent of total national wealth.

Trends in National WealthThe net stock of wealth in the United States at the

end of 1993 was about $50 trillion. Since 1980 it has increased in real terms at an annual rate of about 2 percent per yearabout half the average annual growth rate from 1960 to 1980. (In this section all comparisons are in terms of constant 1993 dollars.)

Public capital formation slowed down markedly between the two periods. Aside from the reproducible capital owned by the Federal Government, consisting largely of military hardware, the net stock of public capital was lower in 1993 than in 1980. During this period, Federal grants to State and local governments for capital projects increased at an average rate of 0.7 percent per year compared with 7.9 percent in the 1960s and 1970s, while capital funded directly by State and local governments shrank at an average yearly rate of 0.4 percent. Government holdings of land and mineral rights lost value over the same period.

Private capital formation in tangible assets also grew more slowly after 1980. The net stock of nonresidential plant and equipment grew 1.2 percent per year from 1980 to 1993 compared with 4.6 percent in the 1960s and 1970s, and the stock of business inventories actually declined. Overall, the stock of private tangible capital grew at an average rate of just 0.5 percent per year between 1980 and 1993.

The accumulation of education capital, as measured here, did not slow down in the 1980s. It maintained

4 R&D depreciates in the sense that the economic value of applied research tends todecline with the passage of time and movement in the technological frontier.

about the same rate of increase as in the 1960s and 1970s, around 4V2 percent per year. This continuing growth reflects both the rising cost of education and the extra resources devoted to schooling in this period. R&D stocks grew faster than physical capital, but at a somewhat slower rate after 1980 than in earlier decades.

Other Federal Contributions to WealthMany Federal policies contributed to the slowdown

in capital formation that occurred after 1980. Federal investment policies obviously were important, but the Federal Government also contributes to wealth in ways that cannot be easily captured in a formal presentation. Monetary and fiscal policies affect the rate and direction of capital formation. Regulatory and tax policies affect how capital is invested, as do the Federal Governments credit assistance policies.

One important channel of influence is the Federal budget deficit, which determines the size of the Federal Governments borrowing requirement. Smaller deficits in the 1980s would have resulted in a smaller gap between Federal liabilities and assets than is shown in Table 2-1. It is also likely that, had the $1.9 trillion in added Federal debt since 1980 been avoided, a significant share of these funds would have gone into private investment. National wealth might have been 2 to 4 percent larger in 1993 had fiscal policy avoided the buildup in the debt.

Government Performance Measures and Indicators of Well-Being

Unlike private business, Government typically lacks a direct measure of the value of its services. As a result, the costs of Government are reported while the benefits often are not. For this reason, it can be difficult to evaluate how well Government agencies are performing their functions. With passage of the Government Performance and Results Act of 1993, Federal Departments and agencies will be selecting performance measures with which to monitor outputs and outcomes of their activities.5

Examples of performance measures for agency outputs would include:

Numbers of loans extended for Federal credit programs

The timeliness with which social security checks are issued.

Number of inspections by the Animal and Plant Health Inspection Service.

Measures of outcomes show how such outputs affect peoples lives. Examples might include:

The number of households lifted out of poverty by social security.

Lives saved or losses prevented through inspection and control measures.

8 Performance measures for Government agencies were given a hearty endorsement in the report of the National Performance Review, "Creating a Government that Works Better & Costs Less.



RATIO TO GDPChart 2-3. NATIONAL WEALTH

5 -

4 -

3 -

2

1

0

EDUCATION CAPITAL

1 PRIVATELY OWNED PHYSICAL ASSETS

PUBLICLY OWNED PHYSICAL ASSETS

1960 1964 1968 1972 1976 1980 1984 1988 1992

n t lGKAfttWJUPCHAF3-C 01/24/94

As appropriate performance measures are developed, it should be possible to integrate them with reports on the cost of Government activities to create a system of financial reporting that would more analogous to private sector accounting statements.Indicators of Well-Being

There are certain broad responsibilities that are unique to the Federal Government as a whole. Especially important are the Governments role in fostering healthy economic conditions, maintaining national security, protecting the environment, and promoting health and social welfare. The design for the set of tables presented here includes a place for a table of social and economic indicators that would serve as rough measures of how well the Federal Government was doing in promoting general welfare and security.

The individual measures in this table would be influenced by many Government policies and programs, as well as by external factors beyond the Governments control. Thus, they would not be outcome indicators in the sense defined above, because such measures indicate the direct results achieved through a program.

Such a table would serve two functions. First, it would highlight areas where the Federal Government

might need to modify its current practices or consider fresh action in order to better serve the public. Second, it would provide a context for evaluating the other tables. For example, Government actions that weaken its own financial position may be appropriate when they promote a broader social objective, as in a recession when increased government borrowing adds to its liabilities while providing an automatic stabilizer for the private sector.

An Interactive Analytical FrameworkNo single framework can encompass all of the factors

that affect the financial condition of the Federal Government. Nor is any framework a substitute for analysis. Nevertheless, the framework presented above offers a useful way of tracing the major financial effects of Federal policies. Increased Federal support for investment, the reduction in Federal absorption of saving through deficit reduction, and other Administration policies to enhance economic growth are expected to promote national wealth and improve the future financial condition of the Federal Government. As that occurs, the efforts will be clearly revealed in these tables.



TECHNICAL NOTE: SOURCES OF DATA AND METHOD OF ESTIMATION

Federally Owned Assets and LiabilitiesAssets

Financial Assets: The source of data is the Federal Reserve Board's Flow-of-Funds Accounts. Two adjustments were made to this data. First, U.S. Government holdings of financial assets were consolidated with the holdings of the monetary authority, i.e., the Federal Reserve System. Second, the gold stock, which is valued in the Flow-of-Funds at a constant historical price, is revalued using the market value for gold.

Fixed Reproducible Capital: Estimates were developed from the OMB historical data base for physical capital outlays presented in Chapter 8. The data base extends back to 1940 and was supplemented by data from other selected sources for 1915-1939. The source data are in current dollars. To estimate investment flows in constant dollars, it is necessary to deflate the nominal investment series. This was done using Commerce Department price deflators for Federal purchases of durables and structures. These price deflators are available going back as far as 1940. For earlier years, deflators were based on Census Bureau historical statistics for constant price public capital formation. The capital stock series were adjusted for depreciation on a straight-line basis, assuming useful lives of 46 years for water and power projects; 40 years for other direct Federal construction; and 16 years for major nondefense equipment and for defense procurement.

Fixed Nonreproducible Capital: Historical estimates for 1960-1985 were based on estimates in Michael J. Boskin, Marc S. Robinson, and Alan M. Huber, Government Saving, Capital Formation and Wealth in the United States, 1947-1985, published in The Measurement of Saving, Investment, and Wealth, edited by Robert E. Lipsey and Helen Stone Tice (The University of Chicago Press, 1989). Estimates were updated using changes in the value of private land from the Flow- of-Funds Balance Sheets and in the Producer Price Index for Crude Energy Materials.Liabilities

Financial Liabilities: The principal source of data is the Federal Reserves Flow-of-Funds Accounts.

Contingent Liabilities: Sources of data are the OMB Deposit Insurance Model and the OMB Pension Guarantee Model. Historical data on contingent liabilities for deposit insurance were also drawn from the Congressional Budget Offices study, The Economic Effects of the Savings and Loan Crisis, issued January 1992.

Pension Liabilities: For 1979-1992, the estimates are the actuarial accrued liabilites as reported in the annual reports for the Civil Service Retirement System, the Federal Employees Retirement System, and the Military Retirement System (adjusted for inflation). Estimates for the years before 1979 are not actuarial; they are extrapolations. The estimate for 1993 is a projection.

National Balance SheetPublicly Owned Physical Assets: Basic sources of data

for the federally owned or financed stocks of capital are the investment flows described in Chapter 8. Federal grants for State and local government capital were added together with adjustments for inflation and depreciation in the same way as described above for direct Federal investment. Data for total State and local government capital come from the capital stock data prepared by John Musgrave of the Bureau of Economic Analysis, Commerce Department.

Privately Owned Physical Assets: Data are from the flow-of-funds national balance sheet. Preliminary estimates for 1993 were prepared based on net investment from the National Income and Product Accounts.

Education Capital: The stock of education capital is computed by valuing the cost of replacing the total years of education embodied in the U.S. population 16 years of age and older at the current cost of providing additional schooling. The estimated cost includes both direct expenditures in the private and public sectors and an estimate of students foregone earnings, i.e., it reflects the opportunity cost of education.

For this presentation, Federal investment in education capital is a portion of the Federal outlays included in the conduct of education and training. This portion includes direct Federal outlays and grants for elementary, secondary, and vocational education and for higher education. The data exclude Federal outlays for physical capital at educational institutions and for research and development conducted at colleges and universities because these outlays are classified elsewhere as investment in physical capital and investment in R&D capital. The data also exclude outlays under the GI Bill; outlays for graduate and post-graduate education spending in HHS, Defense and Agriculture; and most outlays for vocational training.

Data on investment in education financed from other sources come from educational institution reports on the sources of their funds, published in U.S. Department of Education, Digest of Education Statistics. Nominal expenditures were deflated by the implicit price deflator for GDP to convert them to constant dollar values. Education capital is assumed not to depreciate. An education capital stock computed using this method with different source data can be found in Walter McMahon, Relative Returns To Human and Physical Capital in the U.S. and Efficient Investment Strategies, Economics of Education Review, Vol. 10, No. 4,1991. The method is described in detail in Walter McMahon, Investment in Higher Education, 1974.

Research and Development Capital: The stock of R&D capital financed by the Federal Government was developed from a data base that measures the conduct of R&D. The data exclude Federal outlays for physical capital used in R&D because such outlays are classified elsewhere as investment in federally financed physical



capital. Nominal outlays were deflated using the GDP deflator to convert them to constant dollar values.

Federally funded capital stock estimates were prepared using the perpetual inventory method in which annual investment flows are cumulated to arrive at a capital stock. This stock was adjusted for depreciation by assuming an annual rate of depreciation of 10 percent for applied research and development. Basic research is assumed not to depreciate. Chapter 8 contains additional details on the estimates of the total federally financed R&D stock, as well as its national defense and nondefense components (see Budget of the U.S.